Amazon opened its doors in 1995 and has been making headlines ever since, aggressively pursuing market share over profits. Less than two years after they started trading, they were being sued by Barnes & Noble for claiming to be the world’s largest bookstore. That matter was settled out of court (and Amazon continued to use the slogan), but nobody would challenge that now.

The company expanded quickly, opening four European sites, one in Canada, and one each in Japan and China, in the process changing the shopping habits of customers across the globe.

In addition, Amazon partners with specialist, independent, and used bookstores, provides the most popular digital self-publishing platform, and has expanded into Print-on-Demand, audiobooks, and social-networking. And if that wasn’t enough, they also manufacture the #1 dedicated e-reader.

The Kindle

E-readers had been knocking around in one form or another since the late 1990s, but they didn’t really take off until Amazon got into the game.

The very first Kindle was released in November 2007, retailing at $399. It sold out in five-and-a-half hours, remaining out of stock until late April 2008. In the face of competition from B&N, Sony, Kobo, and Apple, successive versions were released with greater memory capacity, expanded functionality, wireless capability, rudimentary browsers, and greatly reduced price. The market exploded.

In January this year, the Kindle 3, on sale for just 4 months, overtook the final book in the Harry Potter series to become the top-selling item in Amazon’s history. While the company has remained tight-lipped on exactly how many Kindles they have shipped since day one, industry estimates place this figure at 15 million, and a market share of 59%.

And to highlight the challenge facing bricks and mortar booksellers, Amazon was estimated to have sold 4 million e-books on Christmas Day alone (along with another 1 million by B&N).

Kindle Direct Publishing

In 2007 Amazon launched their digital publishing platform, allowing anybody who owned the rights to a book to upload an electronic version for sale to the general public. The rights-holder (i.e. the publisher or author) could set the price they chose, and receive 35% commission, with Amazon keeping the rest.

But it wasn’t until 2009, when the Kindle started to sell in real numbers, that successful print authors, such as Joe Konrath, started to experiment with selling e-books. Konrath, who had enjoyed a solid, if unspectacular, mid-list career, decided to e-publish books which had been rejected by his publishers, books that he had previously been giving away for free on his website. Straight away he was making $1000 a month.

Sony, B&N, Kobo, and Apple all began offering digital platforms for authors to sell their work. For the first time, self-publishers had access to a distribution network that could rival anything trade publishing could access. And the low cost of publishing an e-book meant that many writers could consider self-publishing for the first time.

Trade-published writers, who had backlists that had fallen out-of-print, starting publishing them as e-books. Unpublished writers, unable to crack New York, began publishing themselves. By the end of 2010, Konrath had forsaken traditional publishing, released a string of titles as a self-publisher, and was selling 1,000 copies a day. He had become a full-on evangelist for self-publishing, and his numbers were a thorn in the side of the trade publishing world.

Previously unpublished writers were raking it in too. Amanda Hocking, who couldn’t get an agent to take her on, sold a million e-books in nine months. And then John Locke, who never even sent a query letter to an agent, became the first indie writer to hold the top spot in the Amazon Kindle 100, selling a staggering 350,000 copies in the first two months of 2011.

The Agency Agreement

Amazon was approaching a virtual monopoly of the e-book market at the beginning of 2010, and trade-publishing houses knew they had to do something. If a business sells all their widgets to one customer, that customer then controls your pricing policy. Publishers could not allow Amazon to continue heavily-discounting e-books in an effort to win the e-reader war. They needed to allow other players (such as Apple, Google, Kobo, Sony, and B&N to gain some foothold in the market, so that Amazon wouldn’t be able to abuse its dominant position in the future.

The Big 6 Publishers proposed the Agency Agreement, which stated that e-book prices would be set by the publisher, not the retailer, and that no discounting would be allowed. It also set the 70/30 split where retailers kept 30% of the cover price of the e-book, and the rest went to the publisher to divvy out as they saw fit.

Amazon fought hard against the agreement, going as far as to remove Macmillan’s books from sale. The publishers were backed by the agents, and with Apple cosying up to the publishers, Amazon was forced to back down and sign the Agency Agreement.

The Future

Once Amazon couldn’t price new entrants out of the market anymore, its competitors’ sales boomed, and now the marketplace has levelled out a little. And while the rest of the world is far behind the U.S. in terms of e-book market share and e-reader sales, some trends are emerging. Apple is a emerging as a key competitor in Europe. Kobo have been making inroads in Australia. Amazon is losing market share to hungry competitors.

That 55% U.S. e-book market share I mentioned at the top of the post sounds impressive, but that has dropped from a high of 80% to 90%. B&N, with their Nook reader, are grabbing 25%, while Kobo, Sony, Apple, and Google share out 20% (source).

But while Amazon’s slice of the pie is getting narrower, the pie itself is growing so rapidly that the company can be quite confident as it looks ahead to the future. Self-publishers, and trade-published authors with reverted rights on their backlist titles, are in pretty good shape too, now able to earn double the royalty rate since the agency agreement, keeping 70% of their cover price at certain price points.

At the start of the year, Amazon VP Russ Grandinetti declared that “however fast you think this change is happening, it’s probably happening faster than you think”.

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About David Gaughran

David is Irish and lives in Dublin, where it rains every day and conversation is a sport. He writes historical adventures and has helped thousands of authors to self-publish through his workshops, books, and this here blog.

10 Responses to Amazon: The 800 Pound Gorilla

If I knew the answer to that, for sure, I could make a lot of money in the stock market!

I can’t see any company, including Apple and Amazon, dominating in the future for several reasons. First, Apple was able to dominate music because it had the killer device that everyone used, and the killer store where everyone bought their music. Amazon doesn’t have that level of dominance. Around the time when the Agency Agreement was brought in, it looked like it was getting there, which is why publishers acted.

Today, there is strong competition in e-book retailing and severe competition in the e-reader market. The iPad is outperfoming the Kindle in Europe, by far, but it’s hard to say how many people are using it as an e-reader.

I see a fragmented market in the short term – iPads for people who prefer multi-purpose devices, Kindles and Nooks and Kobos, for those who prefer more limited devices. And this feeds in to where people will buy their e-books. Kindle users tend to shop at Amazon, Nook owners at B&N, iPad owners perhaps shop a little more outside their dedicated e-bookstore.

Until someone releases a killer device, and right now it’s hard to say who that will be, we just don’t know. And I don’t see the iPad as the killer device in the e-reading world. It’s too heavy and too expensive. But tablets are developing all the time. Who knows what the iPad 4 will look like. Or the Kindle 5 for that matter. Remember the first iPod?

One thing to watch will be smartphones, they could be the dark horse that surprises everyone.

Aside from devices, Amazon will always sell a lot of e-books, especially since they developed the Kindle app for the iPad (great move). As I said in the post, their slice of the pie in this regard is getting narrower, but the pie is growing so fast that it doesn’t matter so much.

Maybe there is a future where Amazon dominates e-books, but nobody uses the Kindle anymore. But really, anything could happen.

And there’s also massive room for improvement in the way that online retailers display books. I think we will see some people (maybe Indie Bookstores through Google), start pushing “curated” selections as an alternative to the imprimatur of New York Publishing. With a sea of books, wannabe tastemakers will attempt to carve out a niche by pointing readers to selected titles.

But I am doubtful of how successful this could be. In the future, the only gatekeepers are readers.

If I had to bet, I would say that the devices will drive e-book buying habits more than e-tailers will drive device buying habits.

Am fascinated by this sudden explosion of blog activity – haikus as well as articles. Either you’re working very hard these last few days or this blog has been in preparation for some time. The fascination is increased by your disappearance from the Word Cloud last year and reappearance this year. As a blog newbie at http://dimensionsbeyond.typepad.com/
I am naturally interested to see how people go about things.

Hi Gerry! While this all may seem like some enigmatic plan, I assure you that I’m making it up as I go along, just like everybody else. After the Festival in York, I realised the novel needed another draft and disappeared into editing hell. Then I was moving around a lot over the summer, and once I got settled, I was in query hell. 6 months of that is enough for any man, so I decided to do something else. I suppose I have spent all of my free time in the last few years learning as much as I could about the publishing business and where it is headed, so the blog seemed a natural extension of that. I don’t really plan the posts out so much, I might have a vague idea of what I’m going to write the next day and jot some of it down, or sometimes I write the post late into the night, then proof it the next day and add links before posting. I wanted to hit the ground running with it, so I have been posting every day, but I will have to scale that back at some point! I’m going to check out your blog now – I like the title. Dave